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BY : PIYUSH BHARDWAJ JAIKRIT VATSAL
Difference b/w mergers,acquisitions takeover, amalgamation. Merger: a+b = a Consolidation : a+b = c
Types of mergers
Horizontal mergers (kingfisher jet alliance) Vertical mergers
Ex: merck largest drug manufacturer merging with medco ± largest distributor
Eastman kodak.U. IBM. steel) Second wave (1916-1929) ( GM. Union Carbide) Third wave (1965 ± 1969) (LTV) Fourth wave (1984 ± 1989) Fifth wave ( 1992-) .History of m&a First wave (1897.S.1904)( GE.
LTV ( Ling-Temco-Vought) corporation Started by James Ling in 1947 with $2000 investment as ling electric company. p/e ratio. He used securities ( convertible debentures) which inc. With this he was able to buy company much larger than parent company Bought temco reaching in fortune 500 In 1967 bought wilson (a conglomerate) Did hostile takeover of vought .
Can be internal or external( through M&A) Expand to new geographic markets NAV = V(ab) ±[V(a)+V(b)] ±P-E Financial synergy » » Lowering of cost of capital Improvement of bond¶s rating Revenue enhancement Cost reduction Synergy Operating synergy 1. 2. 2. .Reasons for M&A Growth 1.
.Johnson & Johnson Instead of growing internally pursues company who developed successful product Instead of surpassing competitor by internal growth will buy them But pays a huge premium for this. For ex: it bought cordis( medica stent manufacturer) when deal failed to put J&J as leader in this field it went on to buy guidant but the deal failed so it bought pfizer.
Diversification Growing out of parent industry reducing risk and maintaining a stable dividends To enter more profitable industry but this is debatable Co-insurance .
plastics etc. Strategy: To acquire the leading ( first or second rank in industry) company of the industry in which they diversified Leading implies better consumer awareness Effective management and admitting mistakes by quickly selling off the failing parts.What do you do when you can¶t achieve a leading position?? Contrary to name GE is not merely electronics based company it has diversified in insurance. Companies which followed its footsteps failed Quickly realize mistake and refocus . Ex: selling the insurance and air conditioning business. television stations.
Other reasons Horizontal integration Vertical integration ± ± ± ± Assurance of supply Lower inventory cost Not to pay profit to the supplier Transaction cost and disruptions at end of contract Improved management Improved R&D Hubris ± Acquiring for personal motive than economic gains ± Winners curse .
He went on with a series of acquistions starting with seagram universal that was a combination of liquor and universal studios. But since the unsynergistic acquistions started to fail a new management was put in which disassembling away the media and utility part . But Messier the ceo of the company wanted to be a successful media company.a book publishing firm.a french phone company.usa networks). Then he bought series of tv networks (canal plus.Vivendi Was intially an water utilities business from 100 years.
Antitakeover measures Active measures When hostile bid is made Preventive measures To reduce likelihood of hostile bid .
Preventive antitakeover measures Poison pills: to reduce target¶s value in eyes of bidder Preffered stock plan Flip over rights Flip in rights Corporate charter amendments Staggered board amendments Supermajority provision(80% . ceo of gillette after sale to P&G Michael Capellas $14 million for sale of compaq to HP and $39 million for the sale of MCI to Verizon .95%) Fair price provision Dual capitalization Golden parachutes $165 million to james kilts.
Peoplesoft rejected the offer as inadequate and rejected to remove poison pill. the third largest software maker.Oracle peoplesoft merger Oracle was second largest software maker in 2003 It wanted to go for peoplesoft. The fight went on for 1.5 years and peoplesoft in jan.3 billion offer of oracle This shows how poison pills can be used to increase shareholders wealth and that poison pills can¶t stop a determined bidder who is ready to pay higher and higher. . 2005 succumbed to $10. As another defense it offered its customer a rebate of five times what they paid for peoplesoft¶s license fee.
Standstill agreement Are paid to stockholders not to increase there holding above a certain percentage White knight White squire Capital structure changes Pacman defense Target bids back for the bidder .Active antitakeover measures Greenmail Payment of premium to for significant stockholders stock.
Capital Structure changes Recapitalize Share buyback or paying super dividend Shareholders receive a stub with their reduced ownership and equity is replaced by debt Greater voting rights to the management Huge increase in debt on the balance sheet Share price increses Thus it acts as its own white knight Assume more debt Adding debt without recapitalizing Prevents LBO Issue more share Buy shares Divert shares away from hostile bidders and arbritragers Prevent LBO ( reduce borrowing capacity and cash flow) .
Finally he got away with $36 per share for his 865.Carl Icahn Carl icahn owned more than 10% in hammermill paper corporation which was undervalued at $25 per share while the book value was $37 per share.000 shares making profit of 9 million on his investment of 20 million . Icahn suggested to liquidate the assets because of high per share liquidation value which was vehemently opposed by the management.
It was later revealed that Gillette had signed standstill agreement with 10 different companies including colgate palmolive. pepsi co. Finally merged with proctor and gamble .Gillette Gillette was pursued by revlon in 1987.7 billion with net income of $1.7 billion with its line of shavers and Duracell battries. Gillette sales were $10.. KKR etc. When revlon was about to make a $65 tender offer Gillete fended off by paying revlon a greenmail of $558 million and also its investment bank of $ 1. Gillette actually benefited from various takeover threats by cutting costs and thinning out its workforce.5 million. Ii removed weak operations within firm. salomon brothers.
Takeover tactics Bear hug Contacting the board with intention of going hostile Ex: AIG¶s letter to american General corp. ended with ³You can be assured that we will do everything in our power to see this transaction through completion´ Tender offers Proxy fights .
Expensive due to legal filing fees and publication offer Success rate of initial bidder winning the contest is 55%.Tender Offers Not well defined but courts have maintained that a publicly announced intention of buying a firm followed by rapid accumulation of target¶s stocks at a premium is considered tender offer. According to law the purchaser of 5% of the outstanding company stock needs to register with SEC within 10 days Target¶s response: shareholders¶ view TO as favorable development .
. Tender offers keep the management honest as they put pressure on management to produce a shareprice that will increase shareholders¶ wealth. Two tiered TO Partial TO Initial purchases made through shell corporations and partnerships whose name doesn¶t convey the actual buyer If not complete control is established than bidder may ask for a greenmail to part with his shares. The bidder may compare the value of company under its management and if it exceeds company¶s current market value by sufficient amount than it may offer a premium and still profit from the takeover.
No legal procedure as associated with TO. it may be stuck in a undesirable minority position.Why not go for open market purchase?? Open market purchase are cheaper. Open market purchase are difficult to keep secret and people will hold their shares expecting that a premium might be coming forth. Bidder is not assured of acquiring majority shares for control. In TO bidder is not obligated to buy shares unless the required number has been tendered. .
Proxy Fight To bring change in management by using his votes and support from other shareholders. Corporate elections Voting is done by proxy Calling stockholders¶ meeting Proxy fights easier when current management is performing poorly. .
.IBM Lotus deal In 1995 IBM launched $60 per share cash offer for Lotus ( offered 100% premium) Because of the large premium the it resulted in a quick takeover IBM wanted to retain the skilled personnel of Lotus along with valued software rather than physical assets Lotus performance was not very good with stock price falling.
IBM acquisition of lotus made it look like Microsoft .
Solicitation process: Bidder tries to convince the shareholder to vote against the incumbent board Voting process: ± shares with shareholder group unfriendly to management ± Shares controlled by mangement ± Shares controlled by institutions ± Shares held by brokerage firms . Proxy fight process: Starting a proxy fight: bidder decides change of control at the next stockholders¶ meeting.
Lockheed Vs Harold Simmons Harold Simmons launched a proxy fight through his company NL industry ( which had 19% stake in lockheed) he gave proposal to shareholders to eliminate poison pill which would be activated after a shareholder acquired 20% But he failed to convince the institutional investors who were also the majority stockholders in the firm. .
Leveraged Buyouts (LBO) What is LBO? What is MBO? Reasons for LBO: Efficiency gains » Managers might be following agenda of making the firm larger so as to increase their own compensation Reduction in cost of capital » CC = wiki .
Financing for LBO Secured Debt Senior debt: generally 85% of the accounts receivable and 50% of inventory Intermediate debt:80% of the value of equipment and 50% of the real estate. Unsecured or subordinate debt Secondary claim to firm¶s assets Lenders are given warrants . Value are the auction values.
Conditions favoring LBO Stable cash flows Stable and experienced management Room for cost reductions Equity interests of owners Limited debt on firm¶s balance sheet Separable non core business .